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Air Canada to partner with Continental

Air Canada boost its access to the heavily populated New York area and gain much-needed revenues to offset rising fuel costs by partnering with Continental Airlines, the fourth-largest U.S. carrier.

Redeeming Aeroplan points for Air Canada flights comes with fees. (THE CANADIAN PRESS)

By Ross MarowitsTHE CANADIAN PRESS

Thu., July 24, 2008

MONTREAL–Air Canada boost its access to the heavily populated New York area and gain much-needed revenues to offset rising fuel costs by partnering with Continental Airlines, the fourth-largest U.S. carrier.

Canada's largest airline announced Thursday it has signed an agreement in principle that will provide customers a broader network of destinations, frequent flyer benefits and lounge access.

Air Canada (TSX: AC.B) already has an agreement with United Airlines, which is a fellow Star Alliance partner and whose routes don't overlap Continental's. Continental (NYSE: CAL) announced in June that it also plans to join the alliance after exiting its current partnership with Sky Team.

"You put the three networks together and it's probably the best in North America so it gives our customer base the best network that you can get in North America, by far," Ben Smith, Air Canada's chief commercial officer, said in an interview.

Under the new partnership, Canadian travellers will have access to more destinations in the eastern United States, through Continental's hubs in Newark, N.J., and Cleveland Enhanced access to the southern United States, Mexico and Central America will be directed through its Houston hub.

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The Canadian airline, which has announced plans to cut its capacity by seven per cent and lay off up to 2,000 of its 28,000 employees, said the deal isn't designed to allow it to cut the number of direct flights to the United States.

"Our intention is through the partnership to expand our presence and expand our revenue base. That is the experience with most of our partners," Smith said.

Canadians heading to the United States, particularly business travellers stopping in New York, will be able to then proceed to other destinations using the advantages of the Star Alliance network, including the collection and redemption of frequent flyer miles.

Continental provides 3,1000 flights a day to more than 280 U.S. and international destinations. It has more than 45,000 employees.

Air Canada expects more revenue and cost efficiencies through a code-sharing arrangement by attracting U.S. customers that fly Continental and gaining improved access to the lucrative New York market.

Air Canada flies primarily into New York's La Guardia airport. It has two daily flights into JFK and recently introduced service to Newark from Calgary.

The airline will be able to piggy-back off the buying and sales power of the New York City area's largest carrier, Smith added.

"For me to get the attention of the American market now I've got to spend a fortune. If I partner with somebody who is already big there I don't have to spend that much."

The benefits also apply to Continental's other hubs. Air Canada has no plans to boost its three daily flights between the oil centres of Calgary and Houston, although the size of planes may increase, Smith said.

Versant Partners analyst Cam Doerksen said the agreement with Continental was an expected result of the U.S. carrier's desire to join the Star Alliance.

"Continental has an extensive network in Central America and other parts of the U.S. where perhaps United doesn't have the same type of coverage so I just think it opens more opportunities for Canadian travellers to fly to more destinations," he said in an interview.

It may take up to a year before consumers realize the full benefits of this partnership. Continental can't terminate its contract with Sky Team until nine months after the closing of the proposed merger between Delta and Northwest.

While the partnership with Continental is not predicated on the airline joining the Star Alliance, Smith said it's too soon to determine if consumers will benefit before that happens.

"I would speculate that there are some minor things that we will do before they join Star."

Air Canada has also signed a framework agreement with Continental, United Airlines and Lufthansa to create a transatlantic joint venture to provide service to Africa, India, Europe and the Middle East.

It will replace a decade-old bilateral deal with the German carrier.

"The four of us want to work together as a team and we think that together we can really capture a larger share of the market," Smith said.

Tom Varesh of Canaccord Adams said the real benefit of the deal is predicated on attracting passenger traffic than on cost savings.

"It's filling the planes and getting a cut of the ticket price that you normally wouldn't have," he said.

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